Selling South Africa’s rand against Russia’s ruble is becoming one of the trendiest currency trades, with Citigroup Inc., Toronto Dominion Bank and Societe Generale SA among securities firms recommending short rand-ruble positions as political risk surged in one country and diminished in the other.
The rand has been buffeted by a dispute between President Jacob Zuma and Finance Minister Pravin Gordhan, falling 5.8% against the dollar in August to the weakest level since July 7. That came after the ruling African National Congress had its worst election result since the start of democracy in 1994, losing outright control of major cities including Johannesburg, Pretoria and Port Elizabeth and prompting Fitch Ratings Ltd. to warn the government could turn to more populist fiscal policies to win back support.
By contrast, the ruble gained 1% in the month against the dollar as easing tensions over Ukraine improved political prospects for President Vladimir Putin, according to SocGen, which recommended shorting the rand against the ruble on Aug. 26, targeting a 10% gain over the next three to six months.
The ruble may also benefit from a rise in oil prices since the start of the year, according to Citigroup, which entered into its short rand-ruble trade on Aug. 30. Russia, the world’s biggest energy-exporting nation, relies on oil and gas for about 40% of budget revenue. By contrast, most of the metals and other mining commodities that account for more than half of South Africa’s exports have lagged.
The Russian currency has strengthened 6.7% against the rand in the past month. Here are three charts that show why some traders see further gains:
The cost of insuring South Africa’s dollar debt against non-payment using credit-default swaps has climbed since Aug. 22 as investors fret over the battle for control of the country’s purse strings . With tensions easing in Ukraine and an economy showing signs of recovery, things are looking up for Russia’s President Vladimir Putin, and CDS spreads are narrowing. Shorting the rand against the ruble is a way of hedging against rising political risk in South Africa while benefiting from ruble gains, according to Roxana Hulea, a London-based emerging-market strategist at SocGen.
The recovery in oil prices has outperformed a basket of commodities including the industrial and precious metals that form the basis of South Africa’s economy, with the central bank predicting zero growth this year. Just talk of coordinated OPEC action could see oil prices sustaining gains, supporting Russia’s economy and the ruble, according to Citigroup’s Luis Costa, who recommended shorting the rand against the ruble on Aug. 30.
While both nations are suffering from slow growth, Russia’s problems are due to external shocks — the fall in oil prices since 2014, and sanctions — while South Africa’s are structural: high unemployment and power-supply-constraints, according to Cristian Maggio at Toronto Dominion, who recommended a short rand-ruble trade on Aug. 11. The risk of more populist fiscal policies may see the country lose its investment-grade status, weighing on the currency, he said.
The rand’s one-month implied volatility against the dollar, based on prices of options to buy or sell the currency, has soared to the highest relative to the ruble in three years as traders anticipate wider fluctuations in South Africa’s currency. That makes investing in rand more risky. While both currencies may benefit from a general emerging-market rally, the ruble is likely to outperform, according to SocGen’s Hulea.